Capital & Current Accounts (Cambridge International A-Level Accounting)

Partners' capital & current accounts

Spec point — why partners may maintain separate capital accounts and current accounts how to prepare partners’ capital and current accounts

Partners' capital & current accounts

What is a partner's capital account?

• The capital account shows the amounts that were originally invested in the partnership by each partner

  • Plus any amounts of money they may put in at a later date
  • Loans to the business from a partner are not entered into the capital account

• The capital account of each partner is only used for recording the partners’ capital contribution and partners’ withdrawal of capital

  • Withdrawal of capital is different to taking drawings
  • Drawings are not entered into the capital account

What is the layout of a partner's capital account?

• Each partner might have a separate capital account or there might be one combined capital account for the partnership

  • If a combined account is used then there are columns for each partner on both sides

• The capital account has a credit balance and shows the amount owed by the business to the partner(s)

• Entries are only made when the amount of capital invested by the partners changes

  • The entry is on the credit side if it is an increase
  • The entry is on the debit side if it is a decrease

What is a partner's current account?

• The current accounts are prepared after the appropriation account

• The current accounts are treated as working accounts to show the change in the amount owed to each partner by the business

  • Permanent changes go into the capital accounts

    • Such as further investments into the business

  • Temporary changes go into the current accounts

    • Such as profit shares, salaries and interest on capital, drawings and loans

What is the layout of a partner's current account?

• Each partner might have a separate current account or there might be one combined current account for the partnership

  • This is same as for a capital account

• Entries are made on the debit side if the amount the business owes the partner(s) decreases

  • Loss for the year
  • Partner's drawings
  • Interest on a partner's drawings

• Entries are made on the credit side if the amount the business owes the partner(s) increases

  • Profit for the year
  • Interest on a partner's capital
  • Interest on a partner's loan
  • A partner's salary

• The closing balance of the current account shows how much undrawn or overdrawn profits the partner has

  • A debit balance indicates that the partner has taken too much money from the partnership in anticipation of profits
  • A credit balance indicates that the partner has not taken all of their share of the profits

Layout of the partners' current accounts

Exam Hint If you use a combined current account then remember to balance each column separately, similar to how you balance the cash and bank columns in the cash book.

Why do partnerships maintain separate current accounts and capital accounts?

• Partnerships use both a current account and a capital account to keep different types of entries separate

• The capital account only contains the amounts invested by each partner

  • This means that partners can easily see how much everyone has invested
  • This makes it easier to calculate the interest on capital

• The current account shows annual changes made to the amounts owed to the partners by the business

  • This allows the partners to see which partners are withdrawing more money than their profit share

How are loans from partners treated in the accounts of a partnership?

• Loans from partners are treated in a similar way to other loans

• They are not treated as part of the partner’s capital account

  • A loan account is created

• The loan is a liability on the statement of financial position

• The interest is added to the partner's current account

  • The partner can withdraw the interest from the business bank account as drawings

What are the journal entries for the partners' current account?

• At the end of the year journal entries are made for the items in the partner's current accounts

• To remember the journal entries:

  • Identify whether the entry is on the debit or credit side of the partner's current account
  • Identify where the amount has come from

Why are there no entries made in the cash or bank account for salaries and interest?

• A partner does not receive cash when they are awarded interest on their capital or a salary

  • Interest and salaries are a way of sharing the profit

• They are added to the partners' current accounts

  • The balances that the business owes them increases

• The partners may choose to withdraw these amounts as drawings

  • The cash and bank accounts are used at this stage

Worked Example Lydia and Moses are in partnership and own a business which specialises in selling clothing to young people called Top Trends. The following information was extracted from their accounts for the year ended 31 December 2023:

Capital accounts at 1 January 2023
Lydia	50 000
Moses	40 000
Current accounts at 1 January 2023
Lydia	3 420 credit balance
Moses	1 780 credit balance
Drawings for the year ended 31 December 2023
Lydia	6 000
Moses	5 000
Share of profits for the year ended 31 December 2023
Lydia	12 000
Moses	8 000

The partnership agreement provides for

• 5% interest on capital
• 10% interest on drawings
• $1 500 salary for Lydia

Prepare the current accounts for Lydia and Moses for the year ended 31 December 2023. Balance the accounts and bring down the balance at 1 January 2024.

Answer:

• Calculate the interest on capital by multiplying the capital by 5%

Lydia: 5% × $50 000 = $2 500

Moses: 5% × $40 000 = $2 000

• Calculate the interest on drawings by multiplying the drawings by 10%

Lydia: 10% × $6 000 = $ 600

Moses: 10% × $5 000 = $500

• Enter the amounts into a combined current account

  • Enter the opening balances on the credit side

  • Enter the following on the debit side:

    • drawings
    • interest on drawings

  • Enter the following on the credit side:

    • interest on capital
    • salary
    • profit share

  • Balance the accounts

Final answer: Lydia and Moses Final answer: Current Accounts
Final answer: Date	Final answer: Details	Final answer: Lydia Final answer: $**	Final answer: Moses Final answer: $	Final answer: Date	Final answer: Details	Final answer: Lydia Final answer:****$	Final answer: Moses Final answer: $
Final answer: 2023 Final answer: Jan 1	Final answer:** ** Final answer: Drawings	Final answer: 6 000	Final answer: 5 000	Final answer: 2023 Final answer: Jan 1	Final answer:** ** Final answer: Balance b/d	Final answer:** ** Final answer: 3 420	Final answer:** ** Final answer: 1 780
Final answer: Dec 31	Final answer: Interest on drawings	Final answer: 600	Final answer: 500	Final answer: Dec 31	Final answer: Interest on capital	Final answer: 2 500	Final answer: 2 000
Final answer: Dec 31	Final answer: Balance c/d	Final answer: 12 820	Final answer: 6 280	Final answer: Dec 31	Final answer: Salary	Final answer: 1 500
				Final answer: Dec 31	Final answer: Profit share	Final answer: 12 000	Final answer: 8 000
		Final answer: 19 420	Final answer: 11 780			Final answer: 19 420	Final answer: 11 780
				Final answer: 2024 Final answer: Jan 1	Final answer:** ** Final answer: Balance b/d	Final answer:** ** Final answer: 12 820	Final answer:** Final answer: 6 280